The government on February 10, 2011 approved Rs. 7,029 crore (over Rs. 70 billion) as compensation to states for losses incurred on reducing central sales tax (CST) during the current fiscal.
"The cabinet has also approved to make on account payment of compensation to the states, pending finalisation of the guidelines, for revenue loss incurred by states in year 2010-11 because of reduction in CST rate,".
CST is levied when goods are transported from one state to another. It was reduced from four per cent to three percent in 2007-08 and further brought down to two percent in 2008-09 after the introduction of value added tax.
"About Rs. 3,000 crore are likely to be released in the current fiscal while the remaining amount of Rs. 4,029 crore would be released in the next fiscal," Soni added.
However, states are estimating the losses on account of the reduction in CST rate to be around Rs. 20,000 crore and have been demanding more compensation from the federal government.